Inflation vs. Deflation

This important piece of historical evidence comes from the Telegraph:

America's headline CPI screamed to 4.3 per cent in November. This may be a rogue figure, the tail effects of an oil, commodity, and food price spike. If so, the Fed missed its chance months ago to prepare the markets for such a case. It is now stymied.
This has eerie echoes of Japan in late-1990, when inflation rose to 4 per cent on a mini price-surge across Asia. As the Bank of Japan fretted about an inflation scare, the country's financial system tipped into the abyss.

The emphasis is mine. I don't think it's been stressed enough. I think that this will take time to play out, but it's hard to tell. I feel as if I'm in uncharted waters, but I don't feel as if I'm alone. However, this historical argument for deflation goes a long way toward galvanizing my conviction that deflation is winning the battle right now.

Here's another juicy bit of info:

The ECB's little secret is that it must never allow a Northern Rock failure in the eurozone because this would expose the reality that there is no EU treasury and no EU lender of last resort behind the system. Would German taxpayers foot the bill for a Spanish bail-out in the way that Kentish men and maids must foot the bill for Newcastle's Rock? Nobody knows. This is where eurozone solidarity stretches to snapping point. It is why the ECB has showered the system with liquidity from day one of this crisis.

The article also says that 71% of German women want a return to the Deutschmark, a sentiment enkindled by the highest inflation in the Euro's history: 3.1%. Will a collapse of Spain's property bubble destroy the Euro? As the quote above explains, the ECB is trying to follow a dual policy of fighting inflation, while at the same time it is unable, politically, to lower rates. What does this spell for the Euro? How would George Soros play this?

My first instinct is to say that this cannot be good for the Euro's value. However, the Euro just hit all-time highs against the Pound. Will this trend continue or reverse? If interest rates hold in Euros and drop for the Pound, it will. But what will happen if the ECB faces a bank collapse such as Northern Rock? This would cause a plunge in the Euro, either from a loss of confidence, or from finally lowered rates. My own inclination is to say that rates would be lowered, as they have already stopped raising rates.

This thinking spree has caused me to wonder if there will be a new lesson in global money learned soon. When Soros broke the Pound, we learned that currency pegs cannot be maintained forever. Will we soon learn that fiat currencies cannot be maintained across different laws and economies?